Estate Planning

Many People believe that estate planning is only for the wealthy. But we believe that it’s for anyone who cares about some person or some cause. Ultimately, it’s about your family; not your financial statement. It’s about your life and theirs; not about death. And it’s a process; not an event.

In the most general sense, estate planning is a process that ensures that the people and things important to you are treated in a manner you would approve of, both while you are living and after you are gone. Planning isn’t limited to financial assets, real estate, and personal possessions. It’s much broader than simply creating a set of instructions to give away what you own at your death, or trying to minimize taxes and expenses in the future.

It also includes such things as naming someone to look after you if you become incapacitated, to look after your minor children if you’re gone, and to protect adult children from lawsuits and divorces after they receive their inheritance. It’s about planning for the future of a family business, or contributing to charitable and community causes. It might provide your children and grandchildren with a source of funding for their college education, or provide for the proper management and investment of assets for those in the family with special needs. For some, it includes an element of “legacy planning” incorporating your family values, beliefs, traditions, and stories.

In these ways and many others, estate planning is much more than simply planning for death and taxes. It’s about sharing love and creating opportunities for you and the ones you care most about. Legal documents such as wills, revocable living trusts, and powers of attorney can be supplemented with journals, diaries, instructions, or recordings, which provide guidance and wisdom to those left behind.

We welcome the opportunity to learn about your “story” and long-term goals for your family and loved ones you care about in order to craft a personalized and purpose-driven estate plan that speaks volumes of you as a person, and not just a source of inherited wealth.

What is the difference between a Will and a Trust?

A will is a document that tells the world where you want your assets to go when you die. It becomes effective only upon death. Unfortunately, your will controls only the property you own in your own name at the date of death. It does not control joint tenancy property or property that you leave through beneficiary designations such as retirement plans and life insurance unless the named beneficiary is your estate.

The problem with a will is that even though it states where you want certain assets to go upon death, those assets remain titled in your name. As a result, when you die, your loved ones cannot just step in and start handling those assets. Because those assets are titled in your name, your loved ones are forced into the probate court. The assets cannot usually be transferred into the beneficiaries named under your will without an order from the probate court.

Because a will becomes effective only upon death, it does not address what happens in the event you become mentally incapacitated and can no longer handle your financial affairs. With a Will-based estate plan, attorneys typically utilize a Durable Power of Attorney in which one or more persons are designated as the Agent for the Principal who is granting the authority. If there is no Durable Power of Attorney, or in the event the Power of Attorney is not accepted by one or more financial institutions, a disabled person’s loved ones might have no alternative but to file a petition with a court to be appointed as a Guardian and/or Conservator for the disabled person. If approved by the court, the Guardian will be granted specific powers to administer the disabled person’s assets, and often further authorized to handle the disabled person’s daily personal needs.

A trust is a legal contract in which property is held by one or more trustees for the benefit of one or more beneficiaries. There are a number of different types of trusts. Testamentary trusts are trusts created by a person within his or her Will. A testamentary trust might be established to preserve the estate tax exemption; to provide for creditor protection of a spouse, children or other beneficiaries; to provide for a special needs beneficiary; or for a variety of other purposes. The revocable living trust acts as a will substitute and contains instructions for managing your assets during your life and also upon death. A living trust is created during your lifetime and becomes effective immediately when you sign it. After a trust is created, your assets should be transferred into the name of your trust. You can transfer property to the trust, and still maintain control and use of all the property while living. You can revoke or change the trust at any time. You can be the trustee of your trust while living, and because these transfers are made ahead of time, upon your mental incapacity or death, your successor trustees can step into your shoes and start handling your financial affairs without a court order or the need to establish a conservatorship.

Another type of trust is the irrevocable trust, discussed below.

Upon your death, a will becomes a public document through the probate system. Your financial data and list of beneficiaries is on display for all who care to see. A trust, on the other hand, generally remains a private document.

Although a trust needs to be administered upon your death, the cost is normally lower than going through the probate process. The counseling and design of a trust-centered plan is often more extensive and expensive to initially create, but it is more cost effective in the long run.

Who needs a revocable living trust?

When revocable living trusts first became popular in the 1980s, most thought that they were only for the wealthy. Over time, trusts have become a popular planning tool for any size estate. Revocable living trusts are amazingly flexible legal tools that can help the creator of the trust – referred to in legal terms as the “trustmaker”, “grantor” or “settlor” – achieve a variety of goals and objectives. For example, revocable living trusts may be used to avoid the probate process upon death. But to achieve that objective, the trust must be fully “funded” with your assets during lifetime, since assets left in your own name will most likely have to go through probate.

As mentioned above, revocable living trusts can provide a set of instructions for taking care of you and your loved ones if you become disabled.

If you are married, the revocable living trust may provide for the creation of a marital trust and family trust upon the death of the first spouse. You’ll sometimes hear these referred to as “A and B Trusts.” These “subtrusts” are designed to both maximize a married couple’s total estate tax exemptions, and to protect the trust assets against the surviving spouse’s “creditors and predators” – which may include a new spouse should the surviving spouse remarry. After both spouses have died, assets may be distributed to the couple’s children or other beneficiaries in a variety of ways – including:

• immediate outright distributions,
• staggered distributions at various ages,
• lifetime trusts with liberal standards,
• lifetime trusts with conservative standards, or
• special needs trusts.

In summary, anyone who would like to accomplish any of these things in their estate plan would benefit from trust planning.

One of my professional advisors says I don’t need a revocable living trust

It’s not uncommon for professional advisors (attorneys, financial and insurance advisors, CPAs) to think of estate planning as pertaining only to finances, avoiding probate, or reducing taxes. That is the focus of the training most have experienced. Therefore if you have jointly held or beneficiary assets (thereby avoiding probate), or a smaller estate (thereby avoiding estate taxes) the professional may conclude that you don’t need trust planning. However, knowledgeable advisors know that trusts are also used for disability planning, creditor protection for your spouse and children after death, passing along family values, and many other purposes beyond probate and taxes.

I’ve been told that even if I plan with a revocable living trust, I’ll still need something called a Pour-Over Will. What is that?

The Pour-Over Will serves as a safeguard in case an asset gets left outside of your trust. It’s not uncommon to find that in the process of funding a trust (changing title of assets to the trust name), an asset has been overlooked. Sometimes clients acquire new assets in their own name or joint ownership, forgetting that they must be owned by their trust in order for the trust instructions to be effective. Under a “Pour-Over” will, the only beneficiary is your trust. Therefore, your Pour-Over Will catches the overlooked asset, and “pours it over” to your trust after your death. Once titled in your trust, the trust instructions will now apply to the distribution of that asset. However, that transfer will usually still have to go through probate to be put into your trust, because it’s in probate court that the instructions of a will are carried out. This, of course, is not the preferred way to get assets into your trust. It is much more efficient and effective to ensure that all assets are re-titled when your trust is created, and then have in place a system to add new assets to your trust as they are acquired.

Under many state laws, guardians for minor children can be appointed only through a will (not a trust). Therefore, the Pour-Over Will is also used for this purpose.

Who are trustees, and what do they do?

Trustees are those individuals or entities (such as a bank trust department) named in a trust agreement to administer the trust. Trustees are required to manage and invest trust property and to distribute the trust property to certain individuals (the beneficiaries) based upon the instructions contained in the trust. Because trusts often last for years or even decades, a well-designed and drafted living trust agreement should include different trustees for different phases of your life, and the lives of your beneficiaries.

In a typical Revocable Living Trust, you will serve as your own Trustee as long as you remain “alive and well.” When a joint Living Trust is used (a trust created by both), the couple will usually serve as co-trustees of the trust while they are both “alive and well.” When each spouse has their own Trust, it is customary that both spouses will serve as co-trustees of each spouse’s individual Living Trust.

Because of longer life spans and medical advances, more people will suffer periods of disability prior to death; requiring the assistance of others to manage the Living Trust and its assets. One or more Disability Trustees should be named in the Trust document to take care of your personal affairs and assets in the event of disability or mental incapacity. It is critical that the Trust document include detailed instructions for the care of both you and your loved ones in the event you become disabled.

You will also name one or more Death Trustees who will assume management of the Trust upon your death. The death trustees are responsible for all phases of Trust administration, including identifying assets, working with professional advisors (e.g., attorney, accountant and financial advisor) to prepare tax returns, and distributing the trust assets to the named beneficiaries. If assets are to remain in trust for one or more beneficiaries, the death trustees may be appointed as trustees of the beneficiary’s trust share, or other trustees may be named for that role.

What are the primary duties of my Trustee?

A Trustee has the legal duty to carry out the directions set forth in your trust. As a fiduciary, the Trustee cannot derive personal benefits from the assets he or she is entrusted with. If the Trustee does not follow the directions set forth in your trust, they can be subject to personal liability. Some of the duties of the Trustee include taking a complete inventory of the assets when they begin to act as Trustee; obtaining a tax identification number for the trust; determining values of the assets in the trust, if necessary; investing the money in the trust for the beneficiaries of that trust; paying expenses of the trust; preparing accountings for the beneficiaries of the trust; preparing tax returns for the trust; and distributing the assets in accordance with the terms of the trust.

What happens if my Trustee fails to follow the terms of my trust?

A Trustee is required to abide by the terms of a trust. If that Trustee fails to do so, a beneficiary of the trust is not without recourse. One of the benefits of naming co-trustees is that they tend to hold one another accountable. In addition, most trusts will provide a way for the beneficiaries to remove a Trustee, and replace them with the next successor trustee on the list. If no specific provision is made for replacement, a beneficiary may generally petition the Probate Court, and the Probate Court may review the acts of the Trustee.

Who should I select as Trustee of my trust?

You can select an individual as a Trustee, such as a close friend or family member; or a professional Trustee can be selected, such as a financial institution or a bank. A good Trustee should be someone who is honest and trustworthy, because they will have a lot of power under your trust document. The person you choose to act as a Trustee should also be financially responsible, because they will be handling the investments for the benefit of your beneficiaries. The Trustee should be someone who can get along and have a good relationship with the beneficiaries of your trust. They should also possess good record-keeping abilities.

Is the Successor Trustee important?

Yes. It is wise to name not only your immediate successor, but subsequent successor trustees as well. An individual trustee may refuse to accept the position, or may resign from the position due to any number of reasons. The trustee may become disabled or die. Most clients tend to want other family members or close friends to act as successor trustees. But since all individuals eventually pass away, it is good practice to name a bank trust department or other corporate trustee as the final successor trustee on the list. Some clients with very high net worth, or very complex assets, may name an institutional trustee from the very beginning – either as a co-trustee with a trusted family member, or serving as the sole trustee.

What are the advantages of using a corporate trustee?

A corporate fiduciary manages trusts professionally every day. They have experience in the area, and they know what they are doing. They act very objectively to follow the instructions set forth in the trust document. They have investment experience and record-keeping skills. They know the law, and follow the prudent investor rule. If they make a mistake, they have errors and omissions insurance, so the trust beneficiaries have a source to recover any potential damages.

The primary disadvantages of a corporate trustee are cost and the fact that they may not have a personal relationship with the beneficiaries. A family member acting as trustee may better understand the family dynamic, and make better discretionary decisions when it comes to your loved ones.

Wouldn’t it be best if I named a family member as my Trustee?

Although family members will usually serve for little or no compensation, they may not be the best choice for a trustee. While the trust may allow for some discretion, some family members are prone to make decisions on an emotional basis. Most times, the family member is not an experienced trustee and does not know what is required of him or her under the law. If they make mistakes, they may face the wrath (and legal action) of the beneficiaries, or the beneficiaries may be unwilling to take action, and your plans and goals for the beneficiaries are not fulfilled. If you do choose a family member as a Trustee, it is best to train them for the responsibility before you die. Perhaps your attorney or advisor provides successor trustee training, or you can spend time educating them now, before they are called upon to act.

Can I have a corporate trustee and family member trustee act together?

Yes. A corporate trustee and family member trustee can act as cotrustees. In fact, this is sometimes a way to get the best of both worlds. The family member brings knowledge of the family situation, and the corporate trustee knows how to invest and maintain records.

How can I use a living trust to plan for my possible disability?

One of the most important reasons for having a revocable living trust is to plan for a possible incapacity. With improvements in health care and lifestyle, more people are living longer. With this increase in lifespan, the likelihood of becoming incapacitated some time before death is greater than ever. The most important part of estate planning for many people is the ability to keep control. Rather than have a judge appoint a conservator and/or guardian to care for you and your possessions, a good estate plan will allow you to name people you choose to see to your personal care and manage your finances.

An important consideration in a living trust design is the mechanism for determining when you are in fact disabled. Many “boilerplate” trust documents provide that you are deemed disabled when a doctor, or maybe two doctors, make such a determination. You may choose to broaden that to specifically include a medical specialist in the area of your disability. Given the option, however, many people prefer having their spouse, adult children, or other loved ones participate in such a critical determination. After all, certain symptoms of incapacity are noticed first by family members, not by your doctors.

A living trust can include a “disability panel” comprised of medical professionals as well as a combination of family members or friends. The disability panel may be given authority to make a determination of your disability by unanimous vote, by a majority, or any other method you choose. The disability panel combines clinical medical advice with input from people who love you and understand what you would want if you could speak for yourself. That allows your affairs to be handled privately among the individuals you trust the most.

You can also provide detailed instructions in your living trust providing for your ongoing care when you are incapacitated. For example, you may wish to remain in your home with private duty in homecare for as long as possible. Or, you may wish to provide detailed instructions to provide for your daily routines so that you can continue them during your incapacity. In addition to your preference on where to live, these instructions may also include such things as the types of foods you prefer to eat, your daily grooming habits, your favorite hobbies and activities, care of your pets, your preference for religious or spiritual practices, and a description of other beneficiaries whom the trustees are authorized to provide for from the trust assets. Taking the time to consider all of these personal wishes and preferences is part of a well-designed estate plan.

What is “Living Probate?”

Living Probate is a term used to describe what happens to those who become mentally incapacitated without proper planning in place. In that case, another person must be appointed to make financial and other decisions for the incapacitated person because he or she is no longer able to make those alone. This process of arranging for someone to make decisions for the incapacitated person is called a guardianship or conservatorship, depending on the jurisdiction, and is a process supervised by a probate court. In some jurisdictions, a “conservator of the person” is appointed to oversee decisions pertaining to the incapacitated person’s body, while a “conservator of the estate” is appointed to oversee decisions pertaining to the person’s financial affairs.

What happens in a guardianship or conservatorship?

The formal requirements for the appointment of a guardian or conservator will vary among the states, but generally speaking, the process is handled by the probate court. In many situations, the court will appoint a near relative, but there is no guarantee that the person appointed is someone who the incapacitated person would have chosen if they could voice their opinion. Once a guardian or conservator has been appointed, the court authorizes and supervises the decisions of the decision-maker on behalf of the incapacitated person. The person acting as guardian or conservator will often employ the services of an attorney to file petitions with the court to enable the guardian or conservator to sell assets, expend funds for the incapacitated person’s needs, and comply with reporting rules. In addition, an accountant is hired to prepare statements for the court to review and ultimately approve or reject. Since legal and accounting fees are typically paid from the incapacitated person’s assets, this is obviously cumbersome and expensive, and to be avoided if possible. In summary, a person’s unplanned disability will involve substantial costs, time, and frustration for the person and his family.

How can I avoid this scenario?

You can avoid this scenario by planning ahead. Your estate planning attorney can provide, prior to incapacity, appropriate documents that will carry out your wishes, using the people you desire, and avoiding the courts altogether. Documents may include a variety of powers of attorney, health care directives, and trust instructions.

What are some of the things my estate plan should provide for after my death?

The goals that we hear most often from clients for “after I’m gone” include:

• I want to give what I have to the people I care about, with timing and protections that will benefit them the most.
• I want those in charge of my affairs to be the people I pick, based on trust and my belief that they are best able to act for the benefit of everyone involved.
• I want to minimize the expenses of identifying, determining the value of, and transferring what I own.
• I want to make sure my family has the most flexibility in dealing with my debts.
• I want to avoid taxes as much as possible.
• I want everything finished as quickly as possible.
• I want my family to continue to rely upon my trusted advisors.
• I want to keep information about me, my assets, and my plans (such as “who gets what”) private.
• I want to know that the cost of administration is not “open ended” but instead is controlled and limited.
• I want my loved ones to know what to expect. I want them to be brought together through my planning, not driven apart.
• I want my wisdom to be passed along with my wealth.

What are some of the things my estate plan should include for my spouse?

The goals that we hear most often from clients regarding a spouse include:
• I want my spouse to be able to maintain the lifestyle that we currently enjoy after I’m gone.
• I want to protect what I leave my spouse from people who might otherwise take advantage; whether family members or strangers.
• I am in a second marriage, and I want my spouse cared for after I’m gone. But I also want to ensure that my estate goes to my children after my spouse passes away.
• I have handled most of our investments throughout our married life, and my spouse has not been involved. I would like my spouse to maintain control, but I’d also like to provide investment help.
• I want to be sure my spouse can, while still benefiting only my bloodline, make adjustments in my bequests in order to address changes in the circumstances of my children and descendants that occur after I’m gone.
• I want to maximize any tax protections available to my spouse.

What if my spouse remarries?

Most people want to know that if their spouse remarries, the plan for children or loved ones is protected, and not lost to a new spouse. One of the ways this can be accomplished is to have the estate plan require the surviving spouse to sign a prenuptial agreement if they want to maintain control of the assets when they remarry. The plan can make this a recommendation, or it can be as severe as removing the spouse as successor trustee or even as a beneficiary of the trust. This is obviously a counseling discussion with your advisors, and typically works best when both spouses have the identical provision for the other.

How else can I use a living trust to plan for my spouse?

Living trusts can be used to plan for a spouse’s well-being in a variety of ways. During any period that you are disabled, the trust language may authorize the successor trustee – who will often be the surviving spouse either serving alone or serving with a co-trustee – to provide for the spouse’s needs out of the trust assets. Upon your death, the trust may specify that the trust assets are to be funded into one or more new “subtrusts” that may include the surviving spouse as beneficiary. These subtrusts are often used for estate tax planning, to protect the spouse and other beneficiaries from creditors, and to provide you with some control of the assets after your death.

If you have an estate tax problem, a portion of your living trust assets, equal to the Federal estate tax exemption, could be transferred to a “Family Trust.” This is usually designed so that the surviving spouse, children, or other descendants are beneficiaries of the principal and income. Your trust assets in “excess” of the Federal estate tax exemption would be funded into a “Marital Trust” that by its terms must distribute its income to your surviving spouse.

You have the option to authorize the Marital Trust trustee to make distributions of principal from the Marital Trust to the surviving spouse. Upon the surviving spouse’s death, the assets remaining in the Family Trust – including any growth of those assets – will pass to your children or other beneficiaries free of Federal estate tax. Assets in the Marital Trust will be included in the surviving spouse’s estate for estate tax purposes. Any portion of the Marital Trust assets not needed for payment of taxes will be available to pass to the next generation.

Can my spouse be a trustee of the family or marital trusts?

Yes, but naming the surviving spouse as a Trustee should be done only after reviewing all the facts and counseling with your advisors. In a “first time” marriage where both spouses have great confidence in each other, it is common for the surviving spouse to be designated as a Trustee of the Family and Marital Trusts. To maximize the creditor protection aspects of these subtrusts, it is recommended that a “friendly” co-trustee be named to serve along with the surviving spouse. The Trustees can be provided broad authority to distribute income and principal from the Family Trust to beneficiaries that may include the surviving spouse. The Marital Trust may also provide for principal distributions, but only to the surviving spouse.

There are some circumstances where it may not be preferred to have the surviving spouse serve as a Trustee of the Family and/or Marital Trusts. Perhaps a spouse has not had experience dealing with finances, maybe they have poor spending habits, or perhaps the couple is in a second or subsequent marriage. In such circumstances, the couple may prefer that an independent third party serve as Trustee. It is not advised to name a child to serve as the sole Trustee of these Trusts, since such an arrangement would likely lead to conflict if the child denies their parent’s request for a distribution from the Family or Marital Trust.

What are the concerns of blended families in second marriages?

Generally the concern and conflict in planning occurs in those situations where someone with children from a prior marriage has entered into a second or subsequent marriage. The conflict arises out of the client’s desire to provide for the current spouse and yet not disinherit the children from the prior marriage. This can create a challenge if the various estate planning techniques that are available are not understood or properly implemented.

The goal is generally to provide sufficient access and income for your surviving spouse so that he or she may continue to live comfortably after your death. Attitudes and consequences regarding remarriage of your surviving spouse following your death need to be addressed. An open and frank discussion of the potential for friction and conflict between your surviving spouse and your children from a prior marriage needs to occur. The emotional needs of all those involved will need to be anticipated and considered.

Generally speaking, the pure tax technique employed in estate planning is to transfer taxable assets, such as those owned and included in the decedent’s estate, to beneficiaries who are not subject to estate tax. As a result of the unlimited marital deduction, the surviving spouse is typically not subject to tax at the first death. The corollary is to provide for the transfer of non-taxable assets, such as life insurance proceeds contained in an irrevocable life insurance trust, to taxable beneficiaries. The goal, from a pure tax planning perspective is to transfer assets that would be excluded from the gross estate of the deceased, for tax purposes, to beneficiaries who would otherwise be taxable, such as children.

That goal is not always achieved due to the desires and dynamics of each family. Beneficiaries may place significant emotional value on assets that may have little or no intrinsic value. On the other hand, beneficiaries may place significant emotional value on fungible assets such as investments and retirement accounts and attribute little value to personal property of the decedent.

The typical plan utilized for first marriages, where at the death of the first spouse all of the property passes to or is held for the use and benefit of the surviving spouse and at the surviving spouse’s death the property passes to the children will not normally be satisfactory in blended family and second marriage situations. Part of the concern with blended families and second marriages is that your surviving spouse is placed between your children and their ultimate inheritance from you and the potential for hard feelings between your surviving spouse and your children can be created. In this situation the inheritance of your children is dependent upon the spending habits of your surviving spouse.

Your children may view each expenditure by your surviving spouse as a reduction in their inheritance. Their vigilant scrutiny of your surviving spouse in and of itself can create conflict and foster resentment. Your children may believe that your surviving spouse is living too extravagantly, is taking too many luxurious vacations, is squandering their prospective inheritance; or is intentionally spending their inheritance in order to preserve your surviving spouse’s assets for her children. The surviving spouse, on the other hand, may feel that he or she has not been treated properly by your children and may retaliate in a manner that would reduce or eliminate your children’s inheritance. Ideally you should provide for your surviving spouse and your children entirely separately. As a consequence, it makes sense to segregate your children’s inheritance from your surviving spouse’s inheritance.

Should I leave my estate to my spouse or to my children?

Most people want to benefit their spouse in a blended family or second marriage situation and yet still provide for their children. Experience teaches that the potential for conflict is so great that to follow traditional estate planning patterns could be a mistake that could create problems, legal fees, and conflicts between your surviving spouse and your children.

There is a technique that can be employed if that is not a concern. That is the establishment of a trust for the benefit of your surviving spouse that requires that all of the income of the trust be distributed to your surviving spouse. Principal distributions can be prohibited, permitted for your surviving spouse’s health, education and maintenance during her lifetime, or permitted in the total discretion of the trustee. Upon your spouse’s death, the proceeds pass to your children.

The conflicts using this technique, while somewhat diminished remain substantial. However, this technique may be necessary to eliminate the estate tax by utilizing the marital deduction for amounts in excess of your estate tax exemption amount. If your surviving spouse is adequately taken care of, or has wealth of her own and the marital deduction is required to reduce the estate tax, a form of the marital deduction trust can be employed that would minimize the income distributions from the marital trust and prohibit principal distributions. The trust may be subject to estate tax at the second death, which your surviving spouse’s federal estate tax exemption maybe available to shelter.

This type of trust called a Qualified Terminal Interest Property Trust or often referred to as a QTIP trust. This trust differs from the standard marital trust in that your surviving spouse lacks the ability to alter the distribution scheme established by your estate plan. This can be effective in sheltering from tax, delaying the tax, and perhaps avoiding the tax.

The irrevocable life insurance trust (discussed in more detail below) is another technique that should be considered. The life insurance trust could be established for the benefit of your children with life insurance in an amount equal to the value of your entire estate or equal to the amount passing from you to your surviving spouse. This is a classic example of taking taxable assets, passing them to a non-taxable beneficiary (your surviving spouse) while distributing non-taxable assets (the death proceeds in the life insurance trust) to taxable beneficiaries (your children).

Monetarily this can be equalized and the parties can be segregated in use and benefit from your estate. However, if your children have emotional attachment to your actual assets, then this particular planning technique would not be effective. As an alternative, the life insurance trust could be established for the benefit of your surviving spouse and your children could receive your other assets, less any estate tax due.

Do I have to create a living trust if my only asset is a life insurance policy and I name my minor child as the beneficiary?

A life insurance policy will pass to a designated beneficiary without going through the probate process. However, if you have minor children who are the beneficiaries of that life insurance policy, the life insurance company will generally not distribute those policy proceeds to a minor. Instead, someone usually has to go to court and set up a guardianship on behalf of that minor. If you fail to plan properly, you may end up with a guardian appointed by the court, and that guardian may be someone you would rather not have controlling that minor’s money. Once the guardianship is set up, the court will often try to protect the money in a closed account that can only be accessed by court order. Whenever that minor needs that money for things like braces or medical care or education, the Guardian must petition the court to access the money. Plus, there is a cost for ongoing attorney’s fees and court costs. Then when the minor reaches the age of majority (18 in most states), the law goes to the other extreme. The money is then given outright to the minor with no instructions and no control.

When you have a living trust, you can name the trust as the beneficiary of the insurance policy. The trustee then uses the money to provide for the beneficiaries of the trust according to your instructions. No guardianship or court intervention is required.

Who will raise my children if I die while they are still minors?

Some people think that estate planning is for millionaires. In fact, if you have any assets at all, or if you have minor children, estate planning is just as important for you. Not only does the process deal with how assets are distributed at your death, but perhaps more importantly who will raise your children and watch out for their financial well-being.

There are two types of guardianships for minors. The first is a guardianship over the minor, and the second is a guardianship over the minor’s property. Under the law, a minor is legally unable to care for herself and is legally unable to deal with her property.

A guardian over your minor children is named in your Will. If you are using a revocable living trust as the center of your estate plan, it will include a pour-over will as discussed above. In that case, the guardian is named in the pour-over will. A guardian over your minor children’s property is usually not necessary, since your living trust will allow the Trustee to care for and manage your minor children’s property.

The person you name as the guardian of your minor children will be responsible for taking care of your children until each child reaches the age of majority (18 in most states). If you die without a valid will naming the guardian for your minor children, the decision will be made by the court. The court will often name a close family member, but it may not be the family member you would have chosen.

What qualities should I look for when choosing a Guardian for my minor children?

When you are nominating the Guardian of your minor children, the goal is to provide each child as little disruption to his or her life as possible. To accomplish that, you want to choose someone who will raise your children the same way you would raise them if you were still alive. The Guardian should have similar philosophies to yours about raising children, about education, about discipline, and about religious or spiritual matters. A good indicator of how someone might raise your children is how they are raising their own children.

If you are choosing a married person, you will need to decide whether to name just one individual (perhaps your relative) or if you are naming the couple. You should consider what will happen if the guardians you appoint get divorced after your children have moved in with them.

You’ll also want to consider the economic wherewithal of the guardian so that you don’t saddle them with responsibility that will overwhelm them financially. If you have more than one child, and want to keep your children together, you’ll have to name a guardian that is willing and able to take all of them.

All of this assumes that the person you name agrees to take your children. You should always check with them ahead of time to be sure they are willing, and then name back-up guardians in case circumstances change and the person who agreed in advance, is unable to take the children at the actual time of your death.

Should the same person who is raising my children also be in charge of the financial assets?

Sometimes the people who are the most nurturing are not necessarily the best at handling money. Although the person you name as Guardian of your minor children can also serve as Trustee of your trust that may not be the best solution.

It’s easy to see that filling the dual role of Guardian and Trustee presents the potential for a conflict of interest. For example, imagine you leave your four children to your sister as guardian, and you also make her the trustee of your children’s trust. Would it be reasonable for her to use $100,000 from the trust to add two bedrooms and a bath to her home? Many people would say that is reasonable. But what if she wants to use $750,000 from the kids’ trust to buy a larger home when her current home is valued at $300,000? In that case, it might be good to have a second opinion.

These types of scenarios can be avoided when you appoint one person to raise the children, and another to manage the finances. When the Guardian needs funds to help take care of your children, he or she simply contacts the Trustee, and explains the need.

But since the trustee has a measure of discretion in these matters, it’s also important to give clear guidance to the trustee so that your children are cared for in the way you want them to be. Some things to consider for the trustee instructions:

• Can my guardian expand the size of their current house (or buy a new house) in order to house my children?
• Can my guardian buy new appliances (such as bigger washers and dryers)?
• Can my guardian use the funds in the trust to pay for private school?
• Can my guardian use some of the funds to benefit the guardian’s own children so that there isn’t a perception of “special treatment” that will cause resentment between my children and the guardian’s children?
• Can money from the trust be used to take the whole family(including the guardian’s children and mine) on vacation?
• Do I want the trustee to generally be conservative or liberal when allocating funds to the guardian to care for my children?

Do I need to set up a separate trust for each of my minor children?

Many clients set up individual trusts for their adult children to maximize protections. But for minor children, a useful tool is the Common Trust. A common trust is a trust that benefits all the minor children together, as their needs dictate. Each of the children are treated fairly, but not necessarily equally.

For example, imagine a common trust set up for three minors: Sally (age 12), Billy (age 10), and Mary (age 4). Sally may need braces this year at a cost of $3,000, but the trustee does not have to give$3,000 to Bill and Mary to keep things equal. Billy may be constantly outgrowing his clothes and requiring new ones, but Sally and Mary do not need to receive a dollar for dollar payout to match Billy’s. Money is spent from the trust the same way you would spend it if you were still alive and taking care of your children’s individual needs.

When does the common trust end and what happens then?

Most common trusts are designed to terminate when the youngest child reaches a certain age or completes college. At that time, the funds that are left in the trust are divided among all the children, equally or unequally, according to the trust instructions. Instead of outright distributions at that time, you may specify that the funds will pass from the common trust into an individual trust for each child. This preserves a level of protection throughout the child’s lifetime as discussed below.

There are many years between the oldest and the youngest of my 10 children. I don’t want my oldest child to have to wait until they’re 40 to receive their share of the proceeds from the common trust. What can I do?

Once again, you can accomplish almost anything by providing the trustee with clear instructions on what types of things the money in the trust can be spent. For example:

• Can the money be used for medical care for one child, even if it wipes out the whole common trust?
• Are there annual spending limits per child in any category of spending?
• Can the money be used for higher education? If so, what happens if some of the children decide to go to college, and others don’t?
• If the funds in the common trust can be used for advanced education, does that include Masters’ and Doctoral studies or only a Bachelor’s degree?
• Can the trustee advance funds to an older child to buy their first home, to start a business, or to pay the expenses of a wedding?
• If so, are those funds accounted for like every other expenditure in the common trust – or do those advances count against that child’s eventual share?

These and many other questions will be the subject of discussion when you meet with your estate planning attorney to design the trust(s) for your minor children.

What things should I consider as I plan for my adult children?

Like every other part of your plan, you should start by determining your children’s needs and your specific goals for their future.“Fair is not always equal and equal is not always fair,” is a common estate planning quote. You probably have a desire to be fair with your children, but you also recognize that children are unique in their personality, their needs, how they handle money, their marital situation, etc. Therefore, while treating each child fairly, you may decide you also need to treat them differently.

In your estate plan you have the freedom to do what you believe is right, based on your understanding of the individual uniqueness of each child. One may need protection from creditors. Another may have a drug or alcohol problem. Another may have won the lottery, and therefore has little need for an inheritance. One may be married to someone you don’t particularly trust.

The beauty of estate planning is that you can customize your plan to fit each individual set of circumstances.

What is the best way to leave an inheritance to my adult children?

Many clients begin the estate planning process assuming that upon their death they will leave assets to their children as an “outright” distribution. Parents are often reluctant to leave assets in trust for adult children because they don’t want to be seen as overly controlling. In addition, relatively few professional advisors promote the many advantages that a protective trust may provide to an adult child.

But leaving assets in trust for an adult child doesn’t necessarily mean that the child will lose control of the assets. To the contrary, if the child is appointed as a trustee over their own trust, that child will have both control over the trust assets, and can receive critical protections.

There are many ways to leave an inheritance to your children. For instance, you can provide for assets to be held in a trust with staggered distributions based on your best guess of when your child will be mature enough to make good financial decisions. As an example, you could provide for a distribution of one-third of the trust assets upon the child attaining the age of 35, one-half of the remaining trust assets upon the child attaining age 45, and the balance upon the child attaining the age of 55. This would provide the child with protection of undistributed assets while allowing a portion of the trust to terminate at given age intervals. Of course, that would still result in outright distributions at each of those times, and that portion of the inheritance would no longer be protected.

Alternatively, you could provide for your assets to be distributed to your children in continuing lifetime trusts. These trusts will last for the duration of the child’s lifetime. A lifetime trust provides ongoing protection of the child’s inheritance from lawsuits, divorces, and immature or fiscally irresponsible behavior. Within each child’s trust, you can carve out individual distribution guidelines that provide for the manner of distributions in accordance with your values, goals and beliefs. For example if you wish to encourage entrepreneurship, you can provide that the Trustee will distribute funds to provide for the start-up costs of a new business or professional practice. By doing so, you will encourage an entrepreneurial spirit while also providing opportunities otherwise unavailable to your child.

You may also wish to divide your property based on the individual needs and wants of each child. For example, a child who has been employed in a family business for years may be the most suitable person to take over the business. The estate plan can provide for this child to receive the family business while making an equalizing distribution of other assets to other children, who may have no interest in the family business.

Depending on state law, you can also give your child the power to determine who will inherit any remaining trust property upon the child’s death. The ability of a beneficiary (your child) to determine who ultimately gets any remaining trust property is called a “power of appointment.” This power to “rewrite” your estate plan can be very limited (i.e. your child can leave the property only to your descendants),or can very broad (allowing your child to leave the property to any person, whether inside or outside of your bloodline). Granting a power of appointment to a beneficiary may have estate tax consequences, so you always want to receive advice from your professional advisors on this strategy.

How can a trust protect my children’s inheritance?

One of the main reasons to do Estate Planning is to provide loved ones with protection from claims of future creditors and divorcing spouses or lawsuits (“Predators”). If you leave your property to your child as an outright distribution, the property will not be protected.

There is a longstanding concept in trust law known as “spendthrift “protection. These are provisions which provide that the Trustee will have sole control to make distributions from the Trust without interference from others. The spendthrift clause prevents a third party(i.e. a creditor or “predator”) from being able to compel the Trustee into making distributions of trust property for the benefit of the third party. Under the spendthrift rules of most states, a person is free to leave assets in trust for another person, with specific language in the trust specifying who, besides a trust beneficiary, can have access to the trust assets. If the trust includes a “spendthrift” clause that specifically states that trust income and principal is not to be available for payment to a trust beneficiary’s creditors, then as a general rule the trust would be immune from attack by a beneficiary’s creditor. This sweeping protection would apply regardless of the amount or nature of a beneficiary’s liabilities, and would include protection of the trust assets if the child were to go through a divorce.

However, the extent of protection offered by a trust with a spendthrift clause will depend upon state law. Under some states, certain creditors are still allowed access to a trust. This could include a beneficiary’s obligations for alimony or child support, or payments to creditors who have provided certain “necessities of life” to the beneficiary.

Can my child serve as the trustee of her trust share and still have protections?

Yes. Note, however, that the general rule is that a creditor or “predator” may be able to “step into the shoes” of a child in order to enforce a judgment or claim. Once in the shoes of the child, the creditor or “predator” can compel the child to exercise any rights held by the child over the trust assets. For example, if the trust permits the trustee to make distributions of trust income or principal to the trust beneficiary in the trustee’s “sole and absolute discretion,” and the child is the sole trustee and sole beneficiary, in many states such broad language might make those assets available to the child’s creditors.

More protective provisions would limit distributions to the certain things, such as “health, education, support or maintenance.” But even the more seemingly restrictive language is quite broad, as “maintenance” means a distribution necessary to help maintain your child’s standard of living. Distributions for a house, a car, travel could all be included as distributions for your child’s “maintenance.” Also, if your child is named as the sole Trustee of his trust and the trust allows the Trustee to make distributions of income and principal for your child’s support, a creditor who has furnished goods or services that may be classified as “support’ may be able to “step into the shoes” of your child and make a distribution to satisfy the judgment or claim. Generally, if under state law a beneficiary has a right to compel the Trustee to make a distribution, then the creditor will be able to enforce that right.
To keep this from happening, you may want to name an independent party as co-trustee of your child’s trust. In a serious situation, your child could even resign as Trustee, leaving management in the hands of the co-trustee.

Since the independent Trustee has no connection to the creditor or predator, the creditor or predator is generally unable to “step into the shoes” of the independent Trustee and exercise the right of the Trustee to make a distribution. The reason is because the spendthrift clause will prevent anyone from interfering with the independent Trustee’s discretion in making distributions of trust property from the trust. You can choose to give your child “indirect control” over his trust by allowing him to remove and change the co-trustee whenever he wants.

In conclusion, the degree of protection will depend upon the wording in the trust regarding the Trustee’s discretion to make distributions, who the Trustee is, and the rights of beneficiaries and creditors under state law. Nevada, for example, is one of the most protective states for beneficiaries, even when they are serving as a sole trustee.

I don’t expect my children to have problems with creditors or predators, so shouldn’t I just leave my property to them outright?

Even if an adult child is debt free and will never divorce, leaving their assets in a protective trust can still be beneficial. For one thing, life is uncertain, and you have no way of knowing what the future holds for your child. Your son, the doctor, may be sued for malpractice. Your daughter, the entrepreneur, may experience a business failure due to the turbulent economy. Your other daughter, the business executive, could be “downsized.” The bottom could fall out of the market, and wipe out the investments of all three of your children. And any of their marriage relationships, that now seem so strong, can be turned upside down through one lapse of judgment. Assets within the reach of creditors include any assets that the person had inherited as an “outright” distribution.

In addition, millions of Americans become severely disabled at some point during their lifetimes, sometimes as a result of accidents, and sometimes as a result of physical or mental illness. Federal and state governments have a myriad of entitlement programs available to support the disabled, but the majority of these programs are “means tested” – that is, you qualify for aid only if you don’t have too many assets or too much income.

If assets are passed to a child through an outright inheritance, the inherited assets would be counted in determining the child’s eligibility for governmental aid. That would typically disqualify the child from receiving that benefit, and would use up his inheritance instead.

However, those assets can be passed to the child in a spendthrift trust containing a “trigger” provision that converts the child’s trust to a “special needs” trust should the child become seriously disabled or otherwise eligible for governmental assistance. In that circumstance, the trust assets and its income should be excluded from the calculation in determining the child’s eligibility for assistance.

Are there other times a “special needs” trust would be helpful besides a future disability?

Yes. Special needs trusts are used for a wide variety of situations. The most common are for chronic physical or mental health issues. There is little sense in leaving an inheritance to a child or grandchild just to have it taken to reimburse an insurance company or government program.

A special needs trust is also valuable to protect a loved one who is trapped in a drug or alcohol addiction. The money can be managed by a trustee (other than the beneficiary) to provide for basic physical needs and rehabilitation expenses, while preventing its confiscation for reimbursement to government programs, and preventing its use for harmful substances.

But I don’t want to “control from the grave”!

There is a continuum that balances control and protection. You can give up all control over your assets at death, and pass them outright to your beneficiaries. That gives the beneficiaries complete control, and therefore provides no protections.

On the other end of the continuum, you can maintain complete control of your assets after death, provide no control to the beneficiaries, and provide fairly ironclad protections.

Most clients end up planning for something toward the middle of the continuum. They maintain limited control after death, and give the beneficiaries as much control as they can without sacrificing the protections from the beneficiaries’ creditors and “predators.”

I have a child who has led a lifestyle with which I disagree. I don’t want to provide for that child upon my death. Can I disinherit that child by providing that he is only to receive $1.00?

Your children do not have a legal right to your estate. You can leave it to anyone you desire, and disinherit anyone you want to. You do not have to leave them $1.00 to disinherit them. If you want to disinherit someone, it is important to make that clear in your plan documents. This is done by acknowledging the existence of that child, and then affirmatively stating that you have intentionally decided not to provide an inheritance for this child.

If you fail to do an estate plan, your child may inherit by intestate succession under state law. If you create an estate plan but simply fail to name your child as a beneficiary, the child could go into court and claim you just forgot about them. They could then inherit under a statute that protects forgotten children. Therefore, if you are going to disinherit a child, you should make sure you do so clearly and affirmatively.

NOTE: An important exception is found in some states. In Louisiana, for example, children age 23 or younger, or who are permanently incapable of taking care of their persons or administering their estates, are entitled to a portion of their parents’ estates.

If I affirmatively disinherit a child in my estate planning documents, can my child contest it?

Anyone can file an action to contest a Will or Trust. However, that doesn’t mean they will prevail. If an action is filed, that child will have to prove that you either lacked capacity to make the decisions you made in that plan document, or will have to prove that you were under some sort of undue influence when you created your plan.

If you anticipate that someone will claim you lacked capacity to sign your estate planning documents, you may want to have your physician provide you with written documentation that you still have the ability to make your own financial decisions. You can have your estate planning attorney document his or her file with this doctor’s declaration of your capacity. You can also have the signing of your estate planning documents videotaped to show that you were interacting with the attorney about your wishes and confirming your decisions.

Another defense against a claim of incapacity is to specifically state the reasons for the disinheritance such as addiction, trouble with the law, the fact that you gave her money during life, the fact he never visited you or acknowledged your existence during life, or any other rational reason. However, if the reason you state is later found to be incorrect or irrational, your child might be able to successfully avoid disinheritance.

You can also create a financial disincentive for the disinherited relative to challenge the plan. Trusts are more useful for this purpose than wills. For example, a beneficiary that would expect to inherit $100,000 may be left $5,000 as a bequest, with the provision that if the plan is challenged by the individual, he gets nothing at all. Whether or not this works is dependent on state law. Again, a qualified estate planning attorney needs to deal with issues related to disinheriting family members or beneficiaries in general.

I love my child very much and do not want to disinherit him; however, he has a drug problem, and I don’t want to leave him money to use for drugs. Should I disinherit that child?

You could disinherit that child if that is what you wish to do. However, you have other options. As mentioned above, this might be a situation that can be solved with a “special needs” trust. The trustee evaluates the needs of that child, and can do things such as:

• make sure the child has medical insurance in place
• provide food or shelter for that child
• provide distributions based on drug testing
• provide for the costs of rehabilitation or counseling
• disinherit at a later date, if the child doesn’t change his behavior

Through a trust you can control when and how that child receives money through careful planning and clear instructions.

I have two minor children and I have several older children who are all married and well taken care of. I feel my minor children need to be provided for if something happens to me. Is it wrong for me to disinherit my older children?

It is not wrong for you to disinherit your older children if that’s your desire. However, if you are going to make the decision to disinherit them, you may want to consider the psychological effects it can have on those older children. Assuming that you love all your children equally, it would be important to sit down with them and explain why you are taking this action – and then reiterate your reasons in writing within the plan. This will certainly make things much easier than learning of this decision after your death.
In addition, disinheritance can still be worded in a way that removes the sting. For example, you could state that you love and value each of your children equally, but since your older children are already self-sufficient, you have decided to pass the bulk of your inheritance to the younger children.

What is trust “funding” and why is it important?

Funding is the act of transferring your assets to your Living Trust. Think of a Living Trust as a bucket. Just as an empty bucket is of little value, even a well-drafted Trust is of little use unless it is “filled “with your assets. If you create a Living Trust but never get around to funding the Trust, then your unfunded assets will not be controlled by the Trust provisions. At best, the unfunded assets will be transferred to your Trust after you death by use of a “Pour-Over Will.” But such after-death funding generally requires that your Will be probated so that your executor will have legal authority to transfer your assets to your Living Trust. Since many people establish Living Trusts with the expectation that their estate will not require probate, relying upon the pour-over will to fund a Living Trust should be only as a last resort.

And even with a pour-over will you can’t be sure that all of your assets will make it into your trust after death. Most married people own the majority of their assets with a spouse as joint owners with rights of survivorship. Such joint ownership means that the assets will pass automatically upon one owner’s death to the surviving owner.

Likewise, assets such as retirement plans, annuities, and life insurance are contractual assets that pass to persons named on a beneficiary designation form. While such assets will not be subject to probate upon an owner’s death, the assets that pass to individual co-owners or successor beneficiaries will receive none of the valuable tax and personal planning protections that are available for assets passing under the terms of a trust.

Filling your trust “bucket” is accomplished by the process known as trust funding. Trust funding involves transferring title to the assets from your name (or from you and your spouse in the case of a joint account) into the name of the trustees of the trust. Funding is not a difficult task, but it requires attention to detail and persistence. It requires you to notify all of your financial institutions in writing of the proposed change. Most of the time, at least one follow-up communication is required to ensure that proper titling takes place.

The new name on the account is not listed as the “John Doe Living Trust.” Instead, title should be held by the trustee(s) in their fiduciary capacity, as follows: “John and Mary Doe, Trustees, or their successors in trust, under the John Doe Living Trust, dated June 1, 2015, and any amendments thereto.” A shorter version that will work in most cases would be “John and Mary Doe, Trustees, under the John Doe Living Trust dated June 1, 2015.”

Special care must be given for funding certain assets such as real estate, life insurance policies, IRA’s and other retirement assets. Retirement account ownership should never be transferred to a revocable trust, since a change of ownership will be deemed distribution of the assets and cause the retirement account to be fully taxable. Instead, the trust may be named as either a primary or contingent beneficiary of the retirement account to provide maximum after-death flexibility.

If you have an existing trust, you should periodically review whether the trust is properly funded. And when you buy new assets, keep the titling issue in mind. If you are thinking of establishing a trust for the first time, be sure to work with advisors who are committed to the funding process so that all of your planning goals can be achieved.

Do I have to fund all of my assets into my trust?

Most estate planning attorneys would encourage you to fund all of your assets into your trust, either by change of ownership, or by change of beneficiary as mentioned above with retirement plans. A revocable living trust can control only those assets which are titled into your trust name. There are exceptions however, and they may vary from state to state.

Your professional advisors can provide counsel on assets that may need to be handled outside the trust process.

Can I do the funding of my trust myself?

Yes, you can take the steps to fund your trust yourself. However, most clients that start out with good intentions end up never completing their funding. When an advisor checks on the funding process a month or two later, they typically hear the client say one of two things: Either “Remind me what funding is again,” or “We’ve been meaning to get started on that, and haven’t had a chance to.”

The process of funding the trust can be tedious and time consuming depending on the nature and quantity of your assets. The biggest enemies of proper funding are procrastination and frustration. Most attorneys who specialize in estate planning will have processes in place to get funding completed efficiently, and to verify that the retitling has been completed correctly.

You should normally expect to pay your attorney for providing this service. However, you will have the comfort of knowing that the assets are funded and they have been funded correctly. Also, the charges for funding assets into a trust are nominal compared to the costs that would be incurred if unfunded assets had to be transferred through a probate after death.

Your financial advisor who maintains the records on your financial assets can be of great assistance to the attorney because he or she will have records on most accounts, and the means with which to change ownership.

Will I have to amend my trust every time I acquire a new asset? You do not have to amend your trust every time that you acquire anew asset. The trust instructions control the eventual disposition of the assets, but those instructions don’t change each time an asset is included. Instead, acquiring new assets is part of the ongoing funding process, and you will want to take title to the asset in your trust’s name.

If a change occurs that is so big that I need to create a new trust, will I have to fund my assets into my trust all over again? No. Your attorney can “restate” your trust. A restatement acknowledges the creation of your trust on the date you originally created it, and states that you wish to restate that trust in its entirety. The restated contents of the trust will take the place of the contents of your old trust, but the trust name doesn’t change. It’s still the “John Doe Living Trust, created June 1, 2015” or whatever it was originally called. Think of it as the same book cover, but with changes in the text within.

I’ve created and funded my living trust – what do I need to do to maintain it?

It is simply not enough to create a living trust, no matter how well designed and drafted. Changes in your personal and financial circumstances, changes in the law, and changes in your attorney’s knowledge and experience, affect the long-term viability of your estate plan. It is important that you periodically meet with your attorney and other professional advisors to review and update your estate plan.

Of course, you are the expert on your family, so you need to keep your lawyer informed on any changes in your family situation. That would include marriages, divorces, new children, a change of beneficiaries, a change of the distribution split, and so forth. Your attorney is the expert on changes in the laws which would affect your trust. And, as your attorney continues to gain experience and participate in continuing education, he or she may develop new planning techniques that you might want to adopt.

The best type of estate plan maintenance is a formal updating program that provides for regular periodic meetings, often annually or semi-annually, between the client and estate planning attorney. A formal estate planning maintenance program will ensure that your documents remain “state-of-the-art,” will provide for a funding review to verify that all your assets are properly titled to match your estate planning objectives, and will alert you regarding changes in the law that might impact your estate planning objectives.

What is an Irrevocable Trust?

An irrevocable trust is a trust that may not be altered, amended or revoked by the creator of the trust. The reason you may consider creating an irrevocable trust is because all gifts you make to the trust are treated like gifts made to a “third party,” which means the gifts are excluded from your estate for estate tax purposes. This also means any gifts you make to the trust are generally subject to gift tax if the value exceeds the lifetime gift tax exemption discussed in FAQs. However, the benefit is that any growth and appreciation of the assets gifted will escape estate taxation at your death.

You can name the beneficiaries of the trust and provide them with protection from the reach of creditors and “predators” (those who would take advantage of them).You can also carve out distribution guidelines stating the rules on how the gifts may be used for the benefit of your beneficiaries.

Although an irrevocable trust may not be amended or altered by the creator of the trust, a Trust Protector, an unrelated independent third party who is not the creator or a beneficiary of the trust, may be given a power to amend the trust for limited purposes. For example, a Trust Protector may be given the power to amend a trust for drafting errors or changes in the tax law, which necessitates a change to continue the trust’s objectives. In this way, there is some flexibility in dealing with future changes in the law and unforeseen circumstances.

Most states allow an irrevocable trust to be amended by court action. Most courts will allow an irrevocable trust to be amended if to do so would further the trust’s intent and purpose, and if all of the beneficiaries of the trust agree to the modification.

Are irrevocable trusts somehow more “powerful” than revocable trusts?

In general, the only way to obtain tax advantages using a trust is to give up ownership. Irrevocable Trusts require you to give up legal title(ownership) to any property and that can never be changed. Revocable trusts, on the other hand, do not require giving up ownership and maybe changed. But, there are no tax advantages to revocable trusts.

Revocable trusts are primarily used for control and management of assets. The revocable trust usually becomes irrevocable upon your death.

What is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust (“ILIT”) is probably the most frequently used type of irrevocable trust. It’s an irrevocable trust that you can establish to own a life insurance policy on your life. If you personally own a life insurance policy, the policy proceeds will be includable in your taxable estate and subject to estate tax at your death. However, if someone other than you owns the policy, the policy proceeds will be excluded from your taxable estate.

For federal death tax purposes, you are treated as the owner of a life insurance policy if you have any “Incidents of Ownership” in the policy. Incidents of Ownership include, among other rights, the right to borrow the cash value, surrender the policy, or change the beneficiaries of the policy. If an ILIT is created to own a policy on your life, the ILIT, not you will possess all incidents of ownership. Therefore, the death benefits will not be includable in your estate. The ILIT is usually also named as the beneficiary of the death proceeds at your death, and you can provide distribution guidelines and asset protection for the policy proceeds.

Life insurance policies may be subject to substantial fees and charges. Guarantees are subject to the claims paying ability of the insurer. Loans will reduce the policy’s death benefit and cash surrender value, and will have tax consequences if the policy lapses.

I thought my insurance agent told me that insurance proceeds are tax-free. Did I miss something?

Life insurance is NOT always tax-free. One of the most common misconceptions about life insurance has to do with its tax status. In virtually all circumstances life insurance is income tax free. The premiums were paid with after-tax dollars and the death benefit is not subject to income tax

However, life insurance is not necessarily estate tax free. Any assets owned in your estate are potentially subject to estate tax. Most life insurance policies are owned by the insured and therefore included in the estate of the insured. One of the biggest errors by clients in estimating the size of their estate is failing to include the death benefit of life insurance they own.

One of the easiest ways to reduce the size of your estate is to have an irrevocable life insurance trust (ILIT) own the policy rather than yourself. Existing policies can be gifted to that trust, or new life insurance can be acquired by the trust. Life insurance that is gifted to an irrevocable trust is subject to being included in your estate for three years after the date of the gift. Insurance that is initially acquired by the trust can be immediately excluded from your taxable estate.

Who may serve as trustee of the ILIT?

To avoid “incidents of ownership,” and thereby pull the insurance proceeds back into your estate for federal estate tax purposes, the Trustee should be someone other than you.

A family member may be named as the sole Trustee of the ILIT, but it is usually better to name a professional Trustee, such as an accountant or institutional Trustee familiar with the administration of ILITs. The corporate trustee can act as a sole trustee, or as a co-trustee with the family member.

Professional trustees are accustomed to maintaining adequate records, handling notifications of demand rights to beneficiaries, filing any necessary tax returns, reviewing insurance policies for performance, and furnishing periodic accountings and information to the beneficiaries. All of these operational steps in the ILIT are crucial to maintain its federal estate tax-exempt status. Moreover, when the Trustee collects the death benefits from the insurance policy, a professional Trustee may be able to provide better asset protection from the beneficiaries’ creditors or “predators” who would seek to take advantage of them.

What is a Dynasty Trust?

You can utilize your Generation Skipping Transfer (GST) Tax exemption to plan for several generations and build enormous wealth. This type of planning is known as dynasty planning. One of the reasons Congress enacted the GST Tax is to curb the wealth-building effects of dynasty planning. The concept of dynasty planning is to pass the maximum amount of wealth you can to your grandchildren (and subsequent generations) in a dynasty trust without subjecting the transfer to the GST Tax. In so doing, you can exempt the trust property from future GST and Estate taxation.

Allocating your maximum GST Tax exemption to the dynasty trust for your grandchildren (and subsequent generations) will cause the trust to be exempt from GST Tax. Since wealth that is not subject to death tax has the potential to grow much faster than wealth that is taxed, the property transferred to a dynasty trust may accumulate and grow more rapidly than wealth transferred outright.

For example, assume you have $10 Million and that you leave it to your child. For ease of illustration, assume a $10 Million estate tax exemption, a $10 Million GST Tax exemption and a 50% estate and GST Tax rate. At your death, you can leave the full $10 Million estate tax free to your child. Assuming your child is able to double her inheritance to $20 Million over her lifetime, at her death, there would be an estate tax on $10 Million, so that your child’s estate would pay $5,000,000 in estate tax. This would leave an inheritance of $15 Million to your grandchild. Assuming your grandchild is able to double her inheritance over her lifetime, she would have an estate of $30 Million at her death. After estate taxes, she would be able to leave a $20 Million inheritance to your great-grandchild.

In the alternative, what if you had funded a dynasty trust with your $10 million and allocated your estate and GST Tax exemptions to make the trust exempt from estate and GST Tax? Assume that the trust value doubles at every generational level just like the above Scenario. Upon your child’s death there would be $20 million in the trust with no death tax due. Upon your grandchild’s death there would be$40 million in the trust for the benefit of your great-grandchild, with no death tax due.

Notice the amount left to the great-grandchild under the first scenario was $20 million and under the second scenario was $40million.

Once property is exempted from the GST Tax, all future appreciation and growth potential of the underlying assets in the trust also remains exempt from GST Tax.

As you can see, Dynasty Planning can account for growth in wealth over several generations. And, it is logical to most families that any benefits given to their children through their estate plan should be extended to their grandchildren and beyond.

Are there non-tax reasons to use a Dynasty Trust?

The non-tax reasons for creating the dynasty trust vary depending upon the needs and desires of the trust maker. Dynasty trusts can be created to provide creditor and “predator” protection for the beneficiaries of the trust, generation after generation. They can shield against divorce proceedings initiated against a beneficiary of the trust, or creditors of a beneficiary arising out of a business failure.

The dynasty trust can also provide a pool of assets to be managed by a trustee for the benefit of all of the beneficiaries, thus preventing individual beneficiaries from squandering their inheritance by misusing the funds or investing poorly.

The Dynasty Trust can also be used to encourage participation in certain worthwhile causes or discourage behavior that is unacceptable. One of the greatest ways Dynasty Trusts are used by families who value education is to establish a fund that will pay for the secondary and graduate education of many future generations. When you ask most people to name their great-great grandparents, they are unable to do so. But when you provide full college and graduate school tuition and other education costs for your great-great grandchildren through a dynasty trust, you can be sure you’ll be remembered!

What is a Qualified Personal Residence Trust?

A QPRT is a trust that holds a personal residence for a term of years, allowing you, in effect, to give away your residence at a discount and “freeze” its value for federal estate tax purposes – all while continuing to live in it.

How does it work?

A Qualified Personal Residence Trust takes advantage of certain provisions of federal law that allow you to make a gift to the trust of your personal residence, for the ultimate benefit of the remainder beneficiaries at a discounted value. Assume that the remainder beneficiaries are your children – the most common situation for most QPRT planning. Either your principal residence or a vacation home can be transferred into a QPRT. This, in turn, removes the asset from your estate, reducing potential estate taxes at your death.

For gift tax purposes, the original transfer will be treated as a gift to the children, but not a gift of the current fair market value. Instead, it’s a gift of the value of your children’s future right to the residence at the end of the QPRT term (called the “remainder interest”). You must file a gift tax return at the time the residence is transferred to the trust.

The value of the remainder interest is derived by first determining the fair market value of the entire property, and then subtracting the value of the right you retain to live in the residence (your “retained interest”). In general, the longer the term of the trust, the longer you get to live in the property and the larger the value of your retained interest. As the value of your retained interest increases, the value of your children’s remainder interest decreases. This results in a smaller taxable gift by you.

If you haven’t previously used your lifetime federal gift tax exemption amount, the amount of gift tax due may be offset by that amount, thus possibly eliminating the need to pay any gift tax on the transfer of the residence to the QPRT. Of course, if the residence is appreciating quickly, the potential savings can be even greater in a shorter period of time.

What is a charitable remainder trust?

A charitable remainder trust (CRT) is a trust where there are two separate and distinct “beneficial interests,” also known as “split interests.” This means that two different entities have an interest in the assets of the trust. These two interests are usually the “income interest,” which means income from the trust, and the “remainder interest,” which means what is left over at the termination of the trust. In a CRT, a non-charitable beneficiary receives the income interest and a charitable beneficiary receives the remainder interest.

A properly drafted CRT can allow the creator of the trust to take a Federal income tax deduction, as well as provide an income stream for life.

What is a Charitable Lead Trust?

A charitable lead trust (CLT) is an irrevocable trust which provides for distribution of annual payments to a charitable beneficiary or beneficiaries, with the remainder distributed to a non-charitable beneficiary or beneficiaries upon the death of the trustmaker, or upon expiration of a fixed period of time. It is sometimes thought of as the reverse of the charitable remainder trust.

Similarly to charitable remainder unitrusts, there are two types of lead trusts: Charitable Lead Annuity Trusts (CLATs) and Charitable Lead Unitrusts (CLUTs).

A CLAT is established so that the payment to charity needs to be calculated only when the trust is established. Generally the payment remains level over the term of the trust and is independent on the performance of the underlying assets. A CLUT recalculates its distribution annually based on a fixed percentage of the assets in the trust. Depending on investment performance, the payment to charity may go up or down.

What is a private foundation?

A private foundation is a special type of tax exempt entity that is most often established by a single family to fulfill its charitable mission. There are operating and non-operating foundations, though most private foundations are of the non-operating type.

Can a trust be named as a beneficiary of my IRA?

A trust can be named as a beneficiary of your IRA. If the trust does not qualify as a “Designated Beneficiary”, then the trust will be required to withdraw the IRA assets over a shorter period of time than if you had named an individual. If you die before your Required Beginning Date, then the withdrawal period is five years. If you die after your Required Beginning Date, then the withdrawal period is based upon your “assumed life expectancy” found in a table published by the IRS.

As a general rule, a living trust is not a natural person (does not have a heartbeat) and therefore does not have a life expectancy. This would normally argue against naming the trust.

However, structured properly, a stand-alone retirement trust can qualify as a “designated beneficiary,” thus making it possible to “look through” the trust and use the life expectancies of the trust beneficiaries for distribution purposes if the following conditions are satisfied:

A. The trust must be valid under applicable state law.
B. The trust must be irrevocable or become irrevocable at the time of your death.
C. All trust beneficiaries must be individuals and must be identifiable from the trust document.
D. Documentation regarding trust beneficiaries, or a copy of the trust document, must be provided to the plan administrator or IRA custodian no later than October 31 of the year following your death.

If your trust has multiple beneficiaries and some are not individuals, then this can disqualify your trust from “Designated Beneficiary” status. Furthermore, if your trust has multiple beneficiaries and all are individuals, then generally all trust beneficiaries must take distributions over the life expectancy of the oldest trust beneficiary.

It may be advantageous to name a stand-alone retirement trust as beneficiary of the retirement plan. For example, let’s say you want your spouse to be the primary beneficiary of your IRA, and your children from a prior marriage as contingent beneficiaries. At death, your surviving spouse could roll the IRA proceeds to his or her own IRA and meet your objective for the primary beneficiary. However, then he or she could make his or her own beneficiary designation, effectively disinheriting your children. A solution would be to name a stand-alone retirement trust as the primary beneficiary. Properly designed, it would protect your children from being disinherited by their step-parent.

Naming a stand-alone retirement trust as a beneficiary gives the estate planner greater flexibility for post-death planning. It can also afford your beneficiaries some protections that they may not be able to provide for themselves. Moreover, it may give you the opportunity to use your federal estate tax exemption when you may not have enough other assets to do so otherwise and thus limit or eliminate potential estate taxes.

A new trend in estate and financial planning has been growing over the past few years. It goes by many names, but is generally described as legacy planning. Legacy planning recognizes that you are much more than just your financial statement and a list of assets. More and more advisors are coming to the conclusion that comprehensive planning includes helping you pass on not only your wealth (financial assets), but also your wisdom (non-financial assets). That would include such things as your family values, life lessons, family stories, or your views on subjects as diverse as philanthropy, politics, or spiritual matters.

We are seeing a shift in Estate Planning, where clients are realizing that much more can be done with Estate Planning than simply passing on money and wealth. It is possible to create a Legacy. Legacy Planning incorporates planning to pass on your core values and beliefs. Your core values include your fundamental beliefs about life, family, community, and the things you value that give life meaning. These core values translate into hopes and dreams you share for your loved ones and their future. Legacy Planning brings the “human element” to your estate plan. In so doing, you are able to guide them with your wisdom, help them to understand more fully your beliefs, and set in motion your hopes and dreams for their future. It allows you to create an estate plan that uses your personal wealth as a means of accomplishing those long-term goals which define you. Through your estate plan, you can define yourself as a person and not just as a source of wealth.

You ensure that family traditions are carried on from one generation to the next. You can make your hopes and dreams for your loved ones become a reality, such as by providing opportunity for education to future generations. Your estate plan could also provide that the Trustee will match, dollar for dollar in tuition, any scholarship earned by a beneficiary in his or her chosen field of study.

You can stimulate hope and inspire dreams by encouraging entrepreneurship and a strong work ethic. You can strengthen family bonds and harmony by providing distributions that encourage family togetherness, such as regular family vacations. You can assist your child or grandchild to get a start in life by paying for their wedding and assisting them in purchasing their first home.

Perhaps your estate plan will inspire hard work by the beneficiary in his or her career, by providing distributions to match the beneficiary’s annual income after a certain level has been attained. Or, you can provide distributions to a beneficiary who chooses to take up work in an occupation that has social value, even though the job may not pay very well in order to encourage social awareness.

If you have charitable goals, you can encourage your loved ones to further these goals and causes by creating a Charitable Foundation. A Charitable Foundation would allow your children to participate in making contributions to charities supporting your philanthropic goals. This would help encourage philanthropic awareness and behavior in your children.

In addition to motivating behavior, Legacy Planning can also discourage or prohibit unwanted behavior. For example, your trust could provide the Trustee may cut off distributions to a beneficiary who is on drugs or alcohol or has a gambling addiction. Such a provision could also provide the Trustee may make distributions to pay for a rehabilitative program to treat the behavioral problem or addiction and, upon satisfactory rehabilitation, distributions would again continue for the benefit of the beneficiary. The Trustee may also be given the power to require future drug tests to assure the beneficiary has not had a relapse.

The opportunities to plan for your legacy are endless and limited only by your imagination, values, and ability to dream.

Our approach to planning emphasizes a highly personal approach that aims to create a meaningful plan for you and your family that embodies your values and beliefs as a person. We welcome the opportunity to discuss how we can help you create your personal family legacy estate plan.

Our Goals Can Only Be Reached Through The Vehicle Of A Plan, In Which We Must Fervently Believe, And Upon Which We Must Vigorously Act. There Is No Other Route To Success.
Pablo Picasso